Logistics Costs and Economic Development

Logistics Costs and Economic Development

Source: World Bank for GDP data. Various sources for logistics costs.

There is a relationship between the level of economic development (as measured in terms of GDP per capita), the composition of a national economy, and logistics costs. While logistics costs can amount to 25% of delivered costs in some developing economies, they can go as low as 8% in advanced economies. Many factors can influence this cost structure:

  • Transportation infrastructures. They influence transport costs, capacity, and reliability. Extensive transport infrastructures are linked with lower logistics costs.
  • Role of economic sectors. Economies relying on the primary (e.g. agriculture and mining) and secondary (manufacturing) sectors have higher logistics costs than economies relying on the tertiary (services) sector. These variations are linked with the amount of freight in circulation in relation to the total economic output.
  • Interest rates. Mostly impact transactional and inventory carrying costs, which are more extensive with higher interest rates.
  • Level of competition. Monopolistic and oligopolistic markets (e.g. state-owned enterprises) tend to have higher logistics costs as stakeholders have fewer incentives to innovate and use infrastructure (e.g. ports) from a rent-seeking perspective.
  • Information technologies. Reduce transactional and inventory management costs.
  • Legal system. Enforcement of contracts and protection of private property (e.g. terminals, warehouses).
  • Regulations and taxation. The level of constraints the transport sector is subject to, such as environmental regulations, as well as its taxation level.

There is a ‘logistics costs funnel’ that converge as the economy develops towards lower logistics costs. Low levels of economic development are associated with a high variation of logistics costs among countries, while this share narrows at higher levels of economic development. This is mainly attributable to a diversity of infrastructure conditions as well as different roles assumed by the primary and secondary sectors. Despite a high GDP per capita, Australia has a higher share of logistics costs than comparable countries because of the importance of mining in the economy.